PFI scam leads to soaring government debt

The government’s commitment to privatisation is putting schools, hospitals and the care of the vulnerable and elderly at risk.

Gordon Brown has mildly criticised the excesses of the financial markets by pointing out that companies were too quick to hide their debts.

He called for companies to “put bad assets back on to their balance sheets”.

This is hypocrisy. The government is committed to Private Finance Initiatives (PFI) to push privatisation in public services.

PFI hands over control of services such as health to private companies, who may provide a new building.

But the government, through the NHS, then has to pay to lease back this building over several years – which pushes up government debt.

A key advantage of this method of privatisation for the government is that the debt resulting from PFI projects does not appear on the government’s balance sheet.

This is not an insignificant level of debt – the government already has a £200 billion liability from PFI. It hinted this week that this will rise.

It is obvious who benefits from PFI – the private sector contractors, their shareholders and investors. Winners include big banks, accountancy firms, construction companies and private equity firms.

The losers are ordinary people.

The government brags that it is “a global leader in opening up public service markets to competition”.

And indeed it is, but in the middle of the economic crisis our public services are in severe danger. Between a quarter and a third of government spending on public services is tied up in private business.

This is reflected in social care – now a “market” dominated by private sector care providers.

For all the claims that public service contracting transfers risk to the private sector, the reality is that the public sector continues to carry the ultimate risk. When private companies fail we are left to bail them out.

As the global financial crisis deepens, the problem is that the private companies involved in the so-called “public services industry” are heavily dependent on borrowing.

HBOS is one of the largest lenders to PFI projects.

But as loans become more expensive on the money markets, and more difficult to obtain, threats hang over the continuation of many public services.

It is already the case that the costs involved in PFI are massively greater than if the government borrowed the money itself and publicly funded services.

For instance, the first 12 PFI hospitals cost an extra £60 million a year. This would be enough to pay the capital costs for three extra large hospitals a year.

This situation is set to get worse. Investment in new school buildings hangs in the balance as the economic crisis has raised questions over how the government’s Building Schools for the Future programme – which is dependent on PFI for every new building – will be affected.

The government’s much heralded privately financed social housing and regeneration schemes are in trouble.

The rising cost of borrowing means that while the most profitable PFI and Public Private Partnership (PPP) projects may go ahead, those where the rationale was a level of social commitment are likely to grind to a halt.

But it is not just new schemes that will be in trouble.

As much as 80 percent of the profit made in PFI projects comes from refinancing – companies trade on the debt to finance the project, assuming that they will reap the rewards from predicted future profits.

For instance Serco, one of the partners in the Octagon Healthcare consortium that won the Norfolk and Norwich hospital PFI scheme, made a windfall profit of £4.1 million from refinancing.

But the current crisis has put several companies operating in the social care sector, that had been financed through high levels of borrowing, at risk.

The futures of the nursing home and care businesses Four Seasons, Care Principles, NHP and Senad are now uncertain.

There are growing tensions between their owner, the Three Delta private equity house, and its principal investors, the Qatar Investment Authority, who are having difficulties in refinancing a £1.2 billion debt.

New Labour policies have tied public services to the privateers. And the links go deeper too.

Some 24 former Labour ministers – including Charles Clarke, Alan Milburn and David Blunkett – are involved in the PFI industry.

And as the crisis deepens, Labour’s commitment to the market puts the whole of our public services in danger.

The rise of the “public services industry”, a report for Unison by Paul Gosling, is available at » www.unison.org.uk